A Changing Landscape: The Economics of Practicing Law

Data reported in the State Bar’s 2013 Economics of Practice Survey can guide you in making independent decisions about the business side of your law practice. Here’s a look at some of the key findings reported for calendar year 2012 and what they might mean to your practice.

On the national scene, law firm revenues rebounded in 2012, up a modest 1.15 percent, according to ALM Legal Intelligence, based in New York City.

The increase is a positive sign, according to Frederick Esposito, director of administration and chief financial officer for Meyer, Suozzi, English & Klein, Garden City, N.Y. He's a frequent speaker and author on the subject of law firm management, and he's chair of the Association of Legal Administrators Certification Committee.

"I think law firms are getting the picture of what they need to do in the changing landscape," Esposito says. "But the momentum must continue."

What direction is that momentum moving in Wisconsin? The State Bar's 2013 Economics of Law Practice Survey provides some insights. It collects data on business practices in various types of practice settings. And, as the first such survey since 2007, as reported in the 2008 Economics of Practice Survey report, it reveals changes law offices have made to weather the tough economic conditions of recent years and the emergence of new types of legal service providers.

The State Bar sent the survey to 9,000 randomly selected in-state Bar members. That resulted in 1,611 usable responses, for an 18 percent response rate. Respondents were broken down into four categories: private practitioners (872); corporate counsel (236); government, public service, or academic attorneys, and judges (322)(subsequently referred to collectively as "government attorneys"); and "other" (181).

Overall, respondents in all types of practice settings had an average age of 49.2 years, and they had been practicing law for an average of 19.9 years. One-third were women, and two-thirds were men, similar to the gender distribution in the State Bar's membership as a whole.

Use of Billing Methods and Standard Hourly Rates in 2012Private Practice

Billing and Value

Among Wisconsin's private practitioners, 78 percent had a standard (or typical) hourly rate, with an average hourly rate of $229 for 2012, up from $188 in the 2008 survey (2007 figure). After hourly billing, the next two most common billing methods were flat fees (57 percent) and contingent/results-based fees (34 percent).

Clearly, the billable hour is not dead, but attorneys increasingly look to other ways to charge for their services, Esposito says, because clients are demanding it. At a recent Association of Legal Administrators conference, he participated in a panel discussion during which corporate counsel shared their experiences in contracting with private firms.

"They told us that private firms are very good at meeting their requirements," Esposito reports, "but that we don't ask them what they need. And among the things they need are alternative fee arrangements and reduced fee structures."

Meeting corporate clients' needs for better predictability on fees and total costs is vital to success in today's business environment, says Fred Lautz, managing partner at Milwaukee-based Quarles & Brady. "The days are gone when law firms could just raise their rates to cover expenses and increase their income," he says.

Top Marketing Vehicles For Best ResultsPrivate Practice

As Lautz sees it, businesses are asking law firms to assume a more partner-like role. "They're using fewer firms," he says, "and developing larger relationships with those firms in exchange for value-added services that don't increase fees."

The latter might include, for instance, doing presentations on legal issues of interest to clients, and working with in-house risk management staff to focus on best practices for reducing risks. Quarles & Brady also trains its attorneys on how to better monitor budgets to control clients' costs.

Mid-sized firms have had an edge in the economic environment of the past few years, thanks to technological capabilities and having lower overhead than larger firms, and thus being able to charge lower rates, says Thomas Shellander of Neider & Boucher, an 18-attorney firm in Madison. "The trend is for more companies to utilize mid-sized firms that have sufficient horsepower," he says.

Survey Methodology

Constructing an unbiased sample. When reviewing survey results, it's wise to remember one simple rule: A biased sample will produce biased results. It is the goal of every legitimate survey researcher to construct unbiased samples. While completely excluding all bias is almost impossible, several measures can be taken to reduce sampling error.

A sample should accurately reflect the target population. In this case, the target population was all attorneys in Wisconsin who were identified in the State Bar of Wisconsin membership database as having active status. Due to time and budget constraints, it was necessary to choose a smaller, representative sample that would reflect the larger population of attorneys. The sample was stratified, or subgrouped, by trust account (private practice, corporate counsel, government, and other) proportionately to the distribution in the State Bar database of members. The private practice subgroup was stratified further by region and office size, proportionately to the population distribution. Regions were categorized according to State Bar districts. The total sample numbered 9,000 attorneys.

Looking at the responses. A total of 1,611 usable questionnaires were returned by members, for an 18 percent overall response rate, including 872 from private practitioners, 236 from corporate counsels, 322 from government or public service attorneys, and 181 from those categorized as "other."

Separate versions of the survey instrument were developed and sent to members of each stratum. The questionnaires were designed so that Part 1 was common across all four versions, while Part 2 contained specific questions for the private practice, corporate/in-house counsel, and government groups. The analysis focused on differences related to practice setting, location, size, and respondent demographics.

Looking at the respondents. Here is a brief profile of the survey's 1,611 respondents:

Mean age – 49.2 (mean of State Bar members overall is 47.9)

Median age – 51 (median of all members is 48)

Mean and median number of years in practice – 19.9 and 20.0, respectively

Gender:

Women – 34 percent (33 percent of members overall)

Men – 66 percent (67 percent of members overall)

Firm or organization size by number of attorneys:

One – 26 percent

Two to five – 35 percent

Six to 10 – 15 percent

11 to 25 – 12 percent

More than 25 – 11 percent

Another trend Shellander cites is firms using more flat-fee arrangements, when possible. "Clients are demanding that," he says, "especially in the estate planning area. It's fairly competitive out there. At least in the Madison market, many law firms are offering flat-fee options for some services."

Jeffrey Mawicke of Mawicke & Goisman, a 19-attorney firm in Milwaukee, agrees that lawyers are trying harder these days to adjust billing methods and otherwise tweak their bills to suit clients. The flip side to that, he points out, is to get clients to understand the value of lawyers' expertise.

"I think that's what we're struggling with today," Mawicke says. "Most clients do not know how to value what lawyers do. It's up to the attorney to convince your clients that what you do has value for them."

*Group is comprised of government, public service, or academic attorneys, and judges.

Time, Collections, and Overhead

Two-thirds of private practitioners always track time spent on a legal matter, regardless of whether it's billed by the hour or some other way. Esposito says he's "very surprised" that proportion isn't higher. His usual advice to private practice attorneys is to track time spent on all their legal work.

"You need to do that if you're going to be competitive for business purposes going down the road," he says. Tracking time gives attorneys historical data to use to determine what their pricing should be, he explains. What's more, Esposito adds, "You need some metric to use to make informed decisions about whether you can afford to take a case."

Jeff Krause of Krause Practice Management in Waterford also advises his clients – including firms of all sizes across the country – to keep track of their time. "If you're working on a flat-fee basis, for instance," he says, "how can you price that flat fee correctly if you don't know how much time a certain type of legal matter usually takes?"

He notes that electronic tools, which are available at affordable prices, make tracking time fairly painless. "Assuming you spend most of your day on the computer, which most people do," Krause points out, "you can track your time with practically no effort."

Johanna Kirk from Torvinen, Jones, Kirk & Routh, a six-attorney firm in Superior, is among the 66 percent of Wisconsin attorneys who always track their time, no matter how a case will be billed. "That way the client can see how much I put into it," she says. "It's important to track my time so I'm accountable to myself, my firm, and my client."

The survey revealed that the average portion of fees written off as uncollectible in 2012 was 7.0 percent, down from 13 percent in the 2008 survey (a 2007 figure, and thus pre-recession). The average in 2012 was 4.8 percent for firms with 26 or more attorneys, and rose to 8.1 percent for solo practitioners.

"I think the decrease in uncollectible fees since the last survey is a reflection of lawyers doing a better job of collecting the money they're owed, and also a better job of client selection," says Nerino Petro, the State Bar's practice management adviser.

Small-firm attorney Kirk agrees. Talking with clients about costs before and during a matter can go far in averting problems after. "You have to have those conversations with your clients," she says.

As for law firm expenses, the median ratio of overhead expenses to gross revenues for 2012 was 0.38, while the mean average ratio was 0.44. A general rule of thumb is to keep the ratio at no higher than 0.5, Petro says. "When your overhead starts getting upwards of 50 percent of your gross revenues," he advises, "you really have to look at where that money is going."

Full Report is Available to Help Guide Your Practice Management Decisions

For attorneys looking for in-depth information, the full Economics of Practice in Wisconsin: 2013 Survey Report, based on 2012 data, provides the detail needed to get a fuller view of the economic picture of practicing law in Wisconsin. By applying your own data against the survey's aggregate results, you'll see how your individual practice compares. The survey report's straightforward information, charts, and tables can help you make independent decisions to manage your practice more efficiently and effectively. Separate sections cover private practitioners (both solo and in group practices), government/academic attorneys, and corporate attorneys and in-house counsel.

The survey report includes:

Top areas of practice

Private practitioner net income, by demographics

Private practitioner hourly billing rates

Private practitioner billing methods

Office expenses and revenues

Law office support staff salaries

Work volume for each category (private practice, government/academic, corporate)

Benefits by employer category

Billing and timekeeping practices

Trends in marketing legal services

Perceptions of the supply and demand for legal services

Change in workload over past two years and over next two years

Changes made in billable hours policy

The 2013 survey report is available to State Bar members for $79/electronic PDF or $99/print; and to nonmembers for $199/electronic PDF and $249/print. To order, visit www.wisbar.org/2013EconReport, or phone the State Bar at (800) 728-7788.

Note: The survey is intended to enhance opportunities for independent competitive decisions. Each attorney must make independent decisions concerning the interpretation and use of this information in the context of the attorney's specific business.

Workload and Pay

Private Practice. Private practice lawyers reported spending an average of 47 hours per week on work-related activities, including legal work, administration, marketing, and so on. They invested a mean average of 23.4 hours in 2012 for continuing legal education, and they reported a mean average of 53.9 hours of pro bono work.

Fifty-six percent of private practitioners felt their workload was about what they could handle. But 30 percent said their workload was less than they can handle. Kathy Brost, a solo practitioner in Neenah, says that's consistent with what she hears from colleagues in her area, particularly those in small firms or solo practices.

"But I also hear from attorneys in rural communities that they could use more attorneys," Brost says. "They have a hard time attracting new graduates."

The survey asked respondents about the availability of lawyers in their communities. Overall, 45 percent said there were more attorneys than required, 29 percent felt the number of lawyers was about right, and 5 percent said their community was under-lawyered.

Still, 21 percent stated that while there were enough lawyers in their area for clients who could afford to pay, people of limited means had difficulty finding representation.

While the median gross income for all full-time private practitioners was $108,000 in 2012, the median gross income for a full-time lawyer with up to two years' experience was just $48,000, Brost notes.

"That's not enough to cover your student loan debt and be able to support yourself," she says, "especially considering that you just went through seven years of school." Brost points out that this is one of the young-lawyer concerns now being addressed by a State Bar task force of which she's a member.

Median Gross Income by Practice Setting & Gender in 2012

Private Practice

Corporate Counsel

Government*

All Attorneys

$99,996

$156,000

$105,000

Female

$72,000

$144,996

$90,000

Male

$114,000

$156,000

$109,200

*Group is comprised of government, public service or academic attorneys, and judges.

Average Private Practice Billing Rates for Associates

Corporate Counsel. Full-time in-house lawyers earned a median salary of $156,000 in 2012, and they spent a mean average of 48.7 hours a week in work-related activities.

As for workload, 58 percent felt it was as much as they could handle, while 34 percent said it was more than they could handle. Seventy percent said their workload had increased over the past two years. Looking ahead for the next two years, 59 percent predicted their workload would continue to grow.

These are indicative of the reports heard often from corporate counsel colleagues, says Atheneé Lucas, who was until recently an attorney at Manpower in Milwaukee and now is at Fiserv in Brookfield.

"It isn't only the legal work you get," she says, "but it's also the demands on the business side. You get called into business meetings, or you're serving on cross-functional committees." What's more, she notes, companies have cut staff in other departments in recent years and have transferred some of that work onto their legal people.

As a corporate counsel, "I don't have to worry about the partner track and billable hours," Lucas says. "But there are other pressures. The company's numbers have to go up, and I need to help make that happen."

Government Lawyers. This respondent group included a diversity of employees: state agency attorneys, public defenders, public prosecutors, academics, court commissioners, judges, and so on. The median salary for 2012 for this group was $108,000, and they spent an average of 46.5 hours a week in work-related activities.

This group, too, feels significant workload pressures. While 58 percent said their workload in 2012 was as much as they could handle, 36 percent stated it was more than they could handle. Sixty-one percent said their workload had increased in the past two years, while 56 percent expect it to grow in the coming two years, as well.

Angelina Gabriele, an assistant district attorney in Kenosha County, describes the workload situation in many district attorney offices, including hers, as "overwhelming, truly overwhelming." The caseload grows each year, and budget cuts allow no new attorney hiring.

Thus, that 46.5-hour average workweek reported for this disparate grouping of attorneys would not apply to district attorneys across the state, in Gabriele's opinion. In weeks when they have trials, which is every third week, attorneys in her office put in at least 60 hours, while the average for nontrial weeks runs about 48 hours.

She believes the median salary for this group is also a poor estimate. For instance, she's been an assistant district attorney since 1995, so she falls into the group with 16 to 25 years in practice, which had a median income of $97,446 for 2012. Her income fell far short of that figure in 2012.

"I talk to others in the Bar's Government Lawyers Division who work for various state agencies," Gabriele says. "They make more than we do in the district attorney offices, and I'm not sure why there is that discrepancy."

Private Practice Overhead is Up

Total median overhead expenses for private practitioners in 2012 ($102,050) compared to 2007 ($73,250), a difference of $28,800.

Building Business: Website is Top Marketing Tool

For the first time, the website overtook the yellow pages as the primary marketing tool for private practice attorneys. In this survey, 63 percent of those who answered marketing questions said they use a website, compared to 47 percent who use the yellow pages. Yellow page usage was down from 73 percent in 2007, while website usage was roughly the same.

Krause was surprised that only 25 percent of respondents said they use LinkedIn, the online professional network. "I think every lawyer should be on LinkedIn," he advises.

Social media usage remains fairly low, with 18 percent on Facebook and 7 percent using Twitter as marketing tools. Still, lawyers need to pay attention to shifts in client demographics in the years ahead. For instance, many people under age 30 view Twitter as their primary news source, Krause notes.

"Maybe that younger audience doesn't have money now to spend on legal services," he says. "But as they age and continue to use social media heavily, attorneys will need to be there, too."

Other online tools also can help attorneys build their practice. For example, Shellander's firm is a member of Primerus, an organization of 3,000 attorneys in 200 mid-sized firms. His firm can tap into Primerus when it needs to find an attorney in another state or country, just as firms elsewhere will find information about Neider & Boucher in Madison when searching for a Wisconsin firm.

"Primerus does the vetting of firms for you," Shellander says, "and the other firms' price points are about like ours. We find it very advantageous to be a member." He adds that his clients also view the firm's access to this referral network as a plus. "We use that in our marketing," he says.

Other Issues

Other survey findings related to private practice attorneys that caught Esposito's eye included the gender pay gap, giving credit for pro bono work, and the need for succession planning.

The survey showed that females in private practice working full time earned 63 percent, on average, of what males earned in gross income.

"That jumped out at me," Esposito says. "It's an inequity, and I think it's going to change. The makeup of talent in law firms is going to change." While he sees the pay-gap finding in the survey as "discouraging," he says it's characteristic of what's happening in firms in the rest of the country.

Survey results also showed that the male and female gross income levels for full-time attorneys held about even in the first five years of practice, but the gap widened considerably after that.

Dianne Molvig is a frequent contributor to area and national publications.

Esposito also notes that only 20 percent of law firms reported giving credit to their attorneys for pro bono activities. "That's way too low," he says. "At our firm, with 70 attorneys, we don't penalize people on their billable-hour requirements because of their pro bono work."

Finally, Esposito points to the survey finding that 30 percent of survey respondents in private practice were age 60 or older. Bear in mind, he says, that the attorneys in that age cohort typically bring in about 60 percent of a firm's revenues.

"Those attorneys are making a good draw in business," Esposito says. "But after they leave, the firm potentially could lose those clients. In order to maintain client continuity, firms have to start addressing succession issues now."